Failure to Consider Theories Raised by Plaintiff in Prior Action Spells Denial of Dismissal of Second Action on Res Judicata Grounds

• Posted on: Feb 8 2023

By: Jeffrey M. Haber

Previously, this Blog has examined the doctrine of res judicata (here and here). Under the doctrine, a party may not litigate a claim where a judgment on the merits exists from a prior action between the same parties involving the same subject matter. The doctrine applies not only to claims actually litigated but also to claims that could have been raised in the prior litigation. The rationale underlying the doctrine is that a party who has been given a full and fair opportunity to litigate a claim should not be allowed to do so again.¹ 

New York has adopted a transactional approach in deciding res judicata issues.² Under this approach, once a claim is brought to a final conclusion, all other claims arising out of the same transaction or series of transactions are barred, even if based upon different theories or if seeking a different remedy.³ 

“Res judicata is designed to provide finality in the resolution of disputes to assure that parties may not be vexed by further litigation.”⁴ “The policy against relitigation of adjudicated disputes is strong enough generally to bar a second action even where further investigation of the law or facts indicates that the controversy has been erroneously decided, whether due to oversight by the parties or error by the courts.”⁵ As the Court of Appeals noted, “[c]onsiderations of judicial economy as well as fairness to the parties mandate, at some point, an end to litigation.”⁶ 

In Condor Capital Corp. v. CALS Invs., LLC, 2023 N.Y. Slip Op. 00629 (1st Dept. Feb. 7, 2023) (here), the Appellate Division, First Department addressed the foregoing issues, finding that there were issues of fact as to whether the earlier filed action was dismissed on the merits. 

[Ed. Note: The factual background discussed below comes from the parties’ briefing on appeal.]

Condor Capital involved an alleged breach of contract. Plaintiff claimed it suffered damages by reason of Defendants’ breach of the parties’ Portfolio Purchase Agreement (the “Agreement”), wherein Plaintiff sold its loan portfolio to Defendant, CALS Investors, LLC (“CALS”) in November of 2015. The transaction closed in February 2016.

In May of 2017, Plaintiff commenced an action against CALS for breach of contract, based on, inter alia, on the improper calculation of certain targets and for inflated servicing fees, and for breach of the implied covenant of good faith and fair dealing based on the inflated servicing fees. Defendant moved to dismiss. The motion court granted the motion by order dated June 7, 2018.

On January 2, 2019, Plaintiff commenced an action against CALS, as well as its loan servicer. Plaintiff later amended the complaint on May 30, 2019. Plaintiff asserted causes of action for, inter alia: breach of contract. Defendants moved to dismiss the Amended Complaint. 

On March 11, 2020, the motion court granted Defendants’ motion. The dismissal was based upon Plaintiff’s failure to plead a breach of contract cause of action. The motion court also dismissed as duplicative the claims for breach of the implied covenant of good faith and fair dealing and negligence in servicing and administering the loan portfolio. The motion court’s order did not state whether Plaintiff’s claims were dismissed with prejudice, or on the merits.

On July 30, 2020, Plaintiff filed a motion for leave to file a Second Amended Complaint in an effort to address the insufficiency of the First Amended Complaint and to incorporate into its pleading the theories that the motion court declined to consider in ruling on Defendants’ motion to dismiss. On February 8, 2021, the motion court denied Plaintiff’s motion because there was no pleading before the court to amend (i.e., since the court dismissed the First Amended Complaint, Plaintiff could not amend that pleading).

On April 20, 2021, Plaintiff filed a new action against Defendants. The complaint, which largely tracked the proposed Second Amended Complaint that the motion court declined to accept sought $5 million in damages for breach of contract. 

CALS moved to dismiss on res judicata grounds. CALS argued, among other things, that the complaint realleged the same claims, allegations and theories that the motion court previously dismissed as insufficient, and simply restyled the previously dismissed negligence claim as a breach of contract claim.

Defendant also sought dismissal because even if res judicata did not apply, the allegations based on the indemnification provisions of the Agreement were insufficient to state a claim for breach of contract. 

On February 8, 2022, the motion court dismissed the claims as barred by the res judicata doctrine, holding “[t]his case must be dismissed with prejudice because the Court … already determined that no cause of action lies with respect to damages accruing for mismanagement under the … Agreement”.

On Appeal, the First Department reversed.

The Court held that “Defendants did not establish that plaintiff’s newly asserted breach of contract claim [was] barred by the doctrine of res judicata following dismissal of plaintiff’s prior action for failure to plead a cause of action”.⁷ The Court noted that “[i]n the prior action, the motion court dismissed the complaint in its entirety, but declined to consider theories raised by plaintiff in opposition to defendants’ motion to dismiss”.⁸ “Accordingly,” said the Court, “it [was] not clear that the dismissal of the prior action was on the merits and with prejudice, and that plaintiff [was] … barred from bringing an action asserting the proposed claim based on alleged violation of other contract provisions”.⁹ 

Takeaway

When a prior complaint is dismissed on the pleadings for failure to state a cause of action, without any indication that the dismissal is intended to be with prejudice or on the merits, the doctrine of res judicata does not bar the timely commencement of the second action purporting to correct the pleading deficiency.¹⁰ In other words, when, as in Condor Capital, the prior action is dismissed solely for defects in the pleading, the present action is not barred by the doctrine of res judicata.

Footnotes

1. See O’Connell v. Corcoran, 1 N.Y.3d 179, 184-185 (2003); Gramatan Home Invs. Corp. v. Lopez, 46 N.Y.2d 481, 485 (1979)).
2. Matter of Reilly v. Reid, 45 N.Y.2d 24 (1978).
3. O’Brien v. City of Syracuse, 54 N.Y.2d 353, 357 (1981) (citation omitted).
4. See Matter of Reilly, 45 N.Y.2d at 28 (citations omitted).
5. Id. (citations omitted).
6. Id.
7. Slip Op. at *1 (citations omitted).
8. Id.
9. Id.
10. Komolov v. Segal, 96 A.D.3d 513, 513 (1st Dept. 2012); Hodge v. Hotel Empls. & Rest. Empls. Union Local 100 of AFL-CIO, 269 A.D.2d 330 (1st Dept. 2000).

Jeffrey M. Haber is a partner and co-founder of Freiberger Haber LLP.

This article is for informational purposes and is not intended to be and should not be taken as legal advice.